President-Elect Trump Inherits a Strong U.S. Economy with Slowing Inflation: What to Expect in 2025

The 2024 election saw the economy take center stage, with voters particularly concerned about inflation. However, as President-elect Trump steps into office in 2025, the U.S. economy is in a solid position. Despite concerns, the economic fundamentals are strong, with a robust labor market, easing inflation, and favorable conditions for consumers. While growth in 2025 is expected to be slower than 2024, a low unemployment rate, business investment, and strong consumer spending will keep the economy expanding. However, the uncertainty surrounding a new administration could bring both opportunities and challenges.

The Labor Market: A Source of Optimism for 2025

At the beginning of 2025, one of the most encouraging signs for the U.S. economy is the strength of the labor market. The unemployment rate, which stood at 4.2% in November 2024, has risen slightly from the 3.4% low in 2023 but remains historically low. Job growth has averaged 180,000 per month through the first 11 months of 2024, down from 232,000 in 2023, but still nearly double the pace seen during the 2010s. Wages have also been increasing more rapidly than inflation for more than two years, helping workers maintain purchasing power.

The labor market should remain strong throughout 2025. Businesses are still reporting difficulties in hiring, layoffs are historically low, and initial claims for unemployment insurance have decreased since mid-2024. This healthy job market bodes well for household income and, by extension, consumer spending. If employment and wages continue to rise, the economy will continue to expand in 2025.

Slowing Inflation and Consumer Spending Growth

Another positive indicator is that inflation has slowed significantly since 2022. While inflation was at its highest in decades during that period, prices have moderated, and goods prices have even decreased over the past year as supply chain issues resolved. This easing of inflation will help reduce the pressure on household budgets, especially for middle and lower-income households.

Upper-income households, in particular, are benefiting from rising home values and a strong stock market. This wealth effect is making them more willing to spend, which will continue to fuel consumption. Although consumer debt is rising, household income is growing even faster, and debt-to-income ratios are lower than pre-pandemic levels, and significantly lower than before the Great Recession of 2007. However, while consumer spending growth will continue into 2025, it will be at a softer pace compared to 2024, as households focus on saving more.

Business Investment: A Bright Spot for 2025

Business investment is another positive factor supporting growth in 2025. With a tight labor market, firms are investing in equipment, technology, and workplaces to boost productivity. Corporate profitability remains strong, and with falling interest rates, these investments are expected to continue. Additionally, the housing market, despite a long-standing shortage, will be supported by lower mortgage rates, which should drive residential construction activity.

Challenges Ahead: Slower Growth and Government Spending

However, there are some challenges for the economy in the coming year. After several years of increased government spending through initiatives like the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the CHIPS and Science Act, the government’s contribution to economic growth is expected to decrease. As a result, overall economic growth is projected to slow in 2025.

While inflation is slowing and consumer spending remains healthy, these factors alone may not be enough to drive the same levels of growth seen in 2024. As a result, we expect real GDP growth of 1.9% in 2025, down from 2.4% in 2024 and 3.2% in 2023.

The Federal Reserve and Interest Rates: What’s Next?

The Federal Reserve has begun cutting interest rates, which should support continued business investment and housing growth. These lower rates will provide businesses with more affordable financing options, which could boost productivity. However, much of the Fed’s ability to continue easing rates will depend on inflation.

The incoming Trump administration’s stance on tariffs and trade will be crucial in shaping the inflation outlook for 2025. While further tariffs on imported goods could push inflation higher and reduce the benefits of lower interest rates, there is still some uncertainty on this front. If tariffs increase, it could reduce consumer purchasing power and contribute to higher prices, potentially slowing economic growth.

Uncertainty Under a New Administration

As with any transition of power, a new administration introduces additional uncertainty. While there are reasons for optimism — such as potential tax cuts and regulatory reductions — there are also risks. Increased tariffs could lead to a trade war, resulting in slower economic growth both domestically and globally. Moreover, any restrictions on immigration could exacerbate labor shortages and reduce long-term growth potential, as foreign-born workers have been crucial in expanding the labor force.

2025 Outlook: Slower Growth but Continued Resilience

Looking ahead, the outlook for 2025 is one of moderate expansion. The economy will continue to grow, but at a slower pace than in recent years. With a strong labor market, lower inflation, and positive trends in consumer spending and business investment, the U.S. economy is poised to continue its expansion — albeit at a more measured pace. While uncertainties around trade policies, tariffs, and immigration could complicate the picture, the economy’s solid fundamentals provide a strong foundation for growth.

Overall, while the road ahead might not be as rapid as the past few years, the U.S. economy in 2025 is expected to remain resilient, offering a stable backdrop for businesses, consumers, and investors.

We’d like to extend a huge thank you to PNC for hosting such an informative and engaging webinar on the National Economic Outlook. The insights shared were invaluable, and we highly recommend checking out their work for more expert analysis on economic trends and forecasts.

All charts and content in this post were generously provided by PNC.

Thank you again, PNC, for your expertise and support!

Disclaimer Summary:

This material is for general information only and does not offer investment or economic advice, nor is it a recommendation to buy or sell securities or adopt any investment strategy. Opinions and forecasts are subject to change and based on information from reliable sources, but accuracy is not guaranteed. It’s recommended to consult an investment professional for personalized financial advice. Forward-looking statements are based on assumptions and risks that may change over time, and actual results may differ significantly from those anticipated. There is no obligation to update these statements, and reliance on them should be cautious.